When negotiating a commercial contract, the parties should carefully draft and negotiate their remedies in the case of a breach of contract. There are many categories of damages that may be awarded for breaching a commercial contract. A poorly drafted contract can result in a company being liable for unanticipated categories of damages.

There are a number of common types of damages. These types include compensatory damages, direct damages, incidental damages, and consequential damages. Compensatory damages, also known as actual damages, is an umbrella term that may include direct, incidental, or consequential damages. Therefore, it is prudent to reduce ambiguity by drafting the contractual damage provisions to more narrowly express the types of damages available in the event of a breach.

Direct damages, also known as general damages, are presumed to have been foreseeable or to have naturally resulted from the breach. The court case Roanoke Hospital v. Doyle & Russell characterized direct damages as “all losses which, in the ordinary course of human experience, can be expected to result from a breach.” For a commercial contract for goods, a buyer’s direct damages may include the cost of purchasing substitute goods. They may also include compensation for the market value of the goods.

Incidental damages refer to the expenses incurred by the non-breaching party in response to a contractual breach in an effort to avoid further losses. In a commercial contract for the sale of goods, the parties may agree to an incidental damages waiver provision.

Consequential damages, also known as special damages, are losses that indirectly result from the contractual breach. They are not ordinarily predictable. Examples of consequential damages include loss of profits, loss of income, loss of use, property damage, attorney fees, and personal injury. The parties may agree to a consequential damages waiver provision in a commercial contract.

There are also categories of damages that are generally deemed to be non-recoverable. These include speculative damages, remote damages, and punitive damages. Speculative damages refer to harm that may occur in the future. Remote damages refer to harm that cannot reasonably be anticipated or that do not have a sufficient causal link to the contractual breach. Punitive damages refer to a monetary award granted in order to punish the defendant for conduct considered intentional, reckless, or grossly negligent. They are additional damages that must be paid by the defendant on top of compensatory damages. Punitive damages are intended to deter others from engaging in such behavior in the future. These categories of damages generally cannot be used as a basis for recovery in a contractual breach case.

Commercial contracts often contain termination provisions, which may allow the parties to terminate the agreement at their discretion. The terminating party may be required to pay the non-terminating party a termination fee in exchange for this right. The termination fee may be an amount based on the amount of goods or services that have been provided by the non-terminating party that remain unpaid. The fee could also be based on compensating for lost profits.

A liquidated damages clause serves the purpose of providing compensation for the failure to provide specific goods or services to the non-breaching party. The formula for the calculation of damages is set forth in the liquidated damages clause.

Damages provisions in commercial contracts should be negotiated to limit the recovery to specified categories of damages and to reduce future uncertainty. A company’s lawyers should also read the damage limitation provisions in the context of the entire contract to ensure that agreement provisions interact appropriately and consistently.